Face Off: 15- & 30-Year Mortgages

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No matter who you ask, today’s 15-year mortgage looks like a terrific deal. But borrowers should carefully weigh the issues before choosing one over the 30-year alternative.

For many borrowers, it would pay to get the 30-year loan at a slightly higher interest rate and then try to save interest charges by paying it off early.

The BankingMyWay survey shows the average 15-year mortgage charging a bargain rate of 4.601%, compared to 5.189% on 30-year fixed-rate mortgages.

A separate survey by Freddie Mac (Stock Quote: FRE) puts the 15-year rate at 4.36% with 0.6 points the lowest since the government-owned company started tracking those loans in 1991. Freddie Mac says the 30-year loan averages a near-record-low of 4.94% with 0.7 points.

At first glance, both surveys make the 15-year loan look like the best deal.

But 15-year loans have a drawback: Because the principal, or amount borrowed, must be paid back in half the time, monthly payments are larger even when the rate is lower than 30-year loans.

For every $100,000 borrowed on a 15-year loan at 4.36%, monthly payments would be $758, according to the BankingMyWay Mortgage Loan Calculator. Payments on a 30-year loan at 4.94% would be just $533.

Because the 15-year loan is paid of twice as fast, interest charges over the loan’s life are dramatically lower, at $36,414 compared to $91,938 on the 30-year deal.

But the bigger monthly payments could leave you in a tough spot if you ran into financial difficulty.

And they could make it hard to borrow enough for the home you want. According to the BankingMyWay Mortgage Required Income Calculator it would take annual income of $98,939 to qualify for a $300,000 loan at the average 15-year rate. A 30-year deal at the average rate would take only $70,049 in annual income. (For another way of looking at it, use the BankingMyWay Maximum Mortgage Calculator.)

There is an alternative: Get the 30-year-loan and making extra principal payments to retire it early. You won’t enjoy the rock-bottom 15-year rate, but it would be easier to qualify for a big loan, and the early payments would cut the interest charges substantially. Best of all, you could make the extra payments only when you wanted.

Imagine you borrowed $100,000 for 30 years at 4.94% and paid an extra $225 per month, raising your payment to the same $758 you’d pay on the 15-year loan. According to the Mortgage Loan Calculator, those prepayments would allow you to pay the loan off in about 16 years, with total interest charges of $44,507. Because of the slightly higher interest rate and extra year of payments, this isn’t as low as the $36,414 in interest you’d pay on the 15-year loan. But it’s a lot better than the nearly $92,000 you’d pay on the 30-year deal if you made no prepayments.

Taking the 30-year loan and making prepayments can produce substantial savings, and leave your finances more flexible than if you took out a 15-year mortgage with a long-term commitment to high monthly payments.

Use the BankingMyWay Shopping Tool to find the best loan offers. Bank of America (Stock Quote: BAC), for example, comes in just below the national average with a 30-year mortgage at 4.875%.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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